All Perspectives

AllPerspectives

38 Perspective(s) trouvé(s)
    15 July 2020
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    The easing of lockdown measures has caused a significant improvement in business sentiment and a mechanical rebound in activity and demand. In the near term, the narrowing of the gap between observed and normal activity levels should gradually lead to less spectacular growth numbers. These are underpinned by pent-up demand, monetary and fiscal policy support and the possibility for households to use the extra-savings accumulated during the lockdown. A lot will depend however on how uncertainty evolves. The health situation is not under control in certain countries and there are concerns about the risk of a flare-up. Households face income uncertainty due to bleak labour market prospects. Against this background, companies may tune down their investment plans.
    In spring 2020, partially paralysed by the Covid-19 pandemic, the US economy entered the worst recession since 1946. Global activity contracted by more than 10% in Q2 before picking up slightly since the month of May. The question is how much of the lost ground can be recovered. With the approach of summer, business surveys are improving and the equity markets are rebounding, signalling rather optimistic expectations, possibly excessively so. Bolstered by the Federal Reserve’s liquidity injections, the markets could be underestimating the risk of corporate defaults, especially given their increasingly heavy debt loads. The latest statistics on the propagation of the virus are not good.
    The economy has been recovering gradually since March, and the rebound in real GDP should be strong enough to enable it to recover rapidly the ground lost in the first quarter. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.    
    Like the vast majority of economies, Japan will go into recession in 2020. The expected rebound in 2021 is likely to be relatively mild. The latest economic indicators reveal an economic situation that is still highly deteriorated compared to normal times. Once again, massive fiscal stimulus has been set in motion. The Bank of Japan’s monetary policy, notably through the Yield Curve Control, should largely reduce the risk of higher financing costs due to the expected rise in public debt.
    Although the Eurozone member countries seem to have the first wave of the Covid-19 pandemic well under control, they are now facing major economic hardships. The most recent leading economic indicators are showing signs of a turnaround but the road ahead will still be long. It will be hard to fully absorb the loss of activity reported at the height of the crisis. Public policies will play a crucial role. In the months ahead, the probability is very high that there will be a sharp increase in the jobless rate, especially for long-term unemployment, and a series of corporate bankruptcies. The European Central Bank (ECB) is providing member states with very favourable financing conditions. A response at the European level must come through, and the Recovery Fund needs to be set up rapidly.
    With the gradual easing of the lockdown restrictions, economic activity has shown signs of rebounding. The government stimulus plan might give further impetus to growth and also contribute to lower carbon emissions. The prospect of an EU stimulus is good news for Germany’s export-oriented manufacturing sector. However, in the absence of a Covid vaccine or better treatments the recovery is likely to be bumpy. GDP is unlikely to return to its pre-Covid level before 2022
    After a massive recessionary shock, the French economy has been showing signs of recovering rather rapidly since May, raising hopes for a V-shaped recovery. Markit’s composite PMI index and household spending on goods both rebounded spectacularly, which is encouraging. But these gains were largely automatic and will lessen as the catching-up effect wears off. To return to pre-crisis levels, it will probably take longer to close the remaining gap than it took to regain lost ground so far. There are several explanations: sector heterogeneity, ongoing health risks and the scars of the crisis. We foresee a U-shaped recovery (-11.1% in 2020, +5.9% in 2021). The risks seem to be well balanced, thanks notably to support measures that have already been taken or are in the pipeline.
    The outbreak of Covid-19 took hold in Italy earlier than in other EU countries, with strong negative effects on the economy. In Q1 2020, real GDP fell by 5.3%. The contraction affected all economic sectors: manufacturing, services and construction. Domestic demand had a negative contribution (-5.5%). Italian households become extremely cautious, reducing expenditures more than income: the propensity to save rose to 12.5%. The pandemic has dramatically hit the labor market: disadvantaged categories, such as low skills workers, those with precarious contracts and young people, are the most severely affected by the lockdown.
    The unprecedented economic contraction in H1 2020 raises serious doubts about the upcoming recovery. Although the reopening phase has proceeded smoothly so far, the recovery in employment was very small in June. Tourism remains under the threat of a resurgence of the Covid-19 epidemics in Europe. The swelling public deficit will force Prime Minister Pedro Sanchez to design a tight recovery package that balances between short-term emergency measures and long-term investments. This difficult equilibrium is likely to heighten the tensions in the governing coalition between Podemos and the socialist party. Subsidies allocated as part of the European Recovery Plan would give Spain some fiscal leeway, but the final terms and amount of the funds are yet to be finalised.     
    We expect GDP to shrink 11.1% this year and grow by 5.9% next year. The unemployment rate could reach 9%, its highest level in 22 years. Different branches of the government have announced measures to counter the impact of the covid-virus but federal government formation talks are still ongoing, which complicates matters. As public debt is expected to come in at 123% of GDP by the end of the year, the room of maneuver is limited, but the need to support the economy will take priority, at least for now.
    Despite successfully managing the Covid-19 pandemic, Greece will not avoid a severe recession in 2020. The tourism industry – which accounts for nearly 20% of the country’s GDP – offers no guarantee for a solid recovery. The prospect of a resurgence in contamination in Europe will weigh on the tourism sector in the coming months. The Greek banking system will further weaken, and public debt will rise sharply. That said, the European Central Bank (ECB) has launched the Pandemic Emergency Purchase Programme (PEPP) in March, which allows the ECB to purchase Greek sovereign debt. This has kept a lid on sovereign rates. This difficult context may entice the government to draw a recovery plan that targets strategic sectors less linked to the tourism industry.
    Due to the late implementation of lockdown measures, the UK was hit hard by the Covid-19 pandemic. Consequently, the country is reopening after its European neighbours, and its economy has been particularly affected. The return to pre-crisis levels will therefore be long and difficult. What’s more, the risk of a protracted crisis is all the greater due to two major threats looming on the horizon: a second wave of the pandemic requiring lockdown measures to be imposed again; and failure to negotiate a free-trade agreement with the European Union before the end of the year.
    After the deepest recession in recent history, economic activity is turning up again due to the gradual easing of the lockdown measures in Switzerland and the neighbouring countries. The exceptionally accommodative monetary and fiscal policy stances are also contributing to the recovery. SMEs have made use of the special loan programme and employees have benefitted from the short-time work scheme. Nevertheless, the recovery is likely to be slow, and economic activity is unlikely to return to pre-crisis levels before end 2022. The government is confident that the Covid-related debt can be repaid without raising taxes.
    At first sight, Sweden ranks among the countries best positioned to face the global economic crisis triggered by the Covid-19 pandemic. The government’s restrictive measures were not as stringent as in most other developed countries (shops and restaurants remained open, for example), the Swedish economy does not have much exposure to the hardest hit sectors, and the authorities have comfortable policy leeway. Yet the country also presents some vulnerabilities that make us less optimistic about its capacity to rebound. Among those are its dependence on global trade and households’ financial situation.
    Faced with the Covid-19 pandemic, the authorities rapidly imposed strict protective measures that effectively maintained the health crisis under control. The economy was also in a relatively good position at the beginning of the crisis – notably thanks to low unemployment and public debt – and fiscal as well as monetary support measures were quickly introduced by the government and the central bank. With all that in mind, the OECD estimates that Denmark will be one of the most resilient economies in 2020, forecasting a fall in GDP “limited” to 5.8%.
    08 April 2020
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    The COVID-19 pandemic has caused a sudden stop in an increasing number of countries. This in turn had led to international spillovers via a decline in foreign trade and an increase in investor risk aversion triggering a global rush for dollar liquidity and a surge in capital outflows from developing economies. A forceful reaction has followed in major economies in terms of monetary and fiscal policy in an effort to attenuate the impact of the pandemic. The near-term dynamics of demand and activity will entirely depend on the length and severity of the lockdown. Once the lockdown has ended, the recovery is likely to be gradual and uneven and policy will have to shift from pandemic relief to growth-boosting measures, thereby putting additional pressure on public finances.  
    The American people and the US economy will no longer be spared the coronavirus pandemic, no more than any other country. Arriving belatedly on US soil and long belittled by President Trump, the virus is now spreading rampantly, to the point that WHO is now preparing to declare the United States the pandemic’s new epicentre. With its federal structure, the US has taken a scattered approach, leaving each state to decide whether or not to introduce lockdown measures. Although the White House has closed the country’s borders (to the European Union and Canada, among others), it was reluctant to restrict domestic movements of goods and people. Foreseeing recession, the markets have plunged and the central bank has launched a veritable monetary “Marshall Plan”.
    China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
    The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many others, the country is exposed to the economic fallout from this crisis. Its significant economic dependence on China, for imports, exports and tourist flows, further weakens the Japanese economy. The latest economic indicators suggest that the shock will be important. Japan will thus go into recession this year. Lacking adequate room for manoeuvre on the monetary front, fiscal policy will need to provide support. To this end, the Abe government would be preparing a major stimulus package.
    The Covid-19 pandemic has triggered a recession in the Eurozone that looks likely to be deep but short-lived. After a difficult year and a half on the economic front, the Eurozone was showing some resilience and was even beginning to show signs of stabilisation. The current shock – in demand, supply and uncertainty simultaneously – has completely changed the outlook. The health measures taken- which have been necessary to protect the population from the virus- have created the conditions for a recession. Monetary and fiscal policymakers have reacted swiftly and, so far, proportionately. However, the profile of the economic recovery remains unclear and will be crucial in assessing the damage ultimately caused by the pandemic.
    The German economy has come to a standstill because of the almost complete lockdown. To fight the economic consequences, the government launched a massive stimulus plan to increase spending in the health sector, protect jobs and support businesses. Nevertheless, production losses may reach dimensions that are well beyond growth falls in previous recessions. In the worst scenario of a three-month lockdown, GDP growth could lose around 20 percentage points and 6 million people may have to join the short-time work scheme.
    Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive recessionary shock triggered by the Covid-19 pandemic. To date, the INSEE estimates the instantaneous loss of economic activity linked directly to confinement measures at 35%, which is equivalent to slashing off 3 points of annual GDP per month of confinement. In March, the business climate was in free fall, which gives us a first glimpse of its scope. A full arsenal of measures have been deployed to mitigate the shock as best possible. According to our estimates, French GDP could contract by 3.1% in 2020, more than the 2.8% decline reported in 2009, before rebounding by 5.4% in 2021. These forecasts are highly uncertain, with risks on the downside.
    The outbreak of Covid-19 hit Italy while the economy was already contracting. The exceptional growth of infected people has brought the Italian Government to take harsh measures, that include stopping all economic activities, excluding those considered as necessary, and imposing a quarantine for the entire population. The combination of an induced supply and demand shocks is going to cause a recession, which is expected to be deep and to last at least until June. In 2020 as a whole, despite the strong support coming from fiscal and monetary policy, the Italian economy should decline by some percentage points.   
    Spain is Europe’s second hardest-hit country by the coronavirus pandemic, and is likely to suffer a sharp economic contraction this year. The economic impact remains hard to quantify. GDP is nonetheless likely to fall by more than 3% in 2020, before a recovery in 2021. The structure of the Spanish economy – turned heavily towards services and with a high proportion of SMEs – suggests that the economic shock could be greater than in other industrialised countries. Endemic unemployment could intensify, leaving a lasting mark on growth over the medium term. However, the improvement in public finances before the virus outbreak and a more stable political situation gives the government some leeway to face the crisis.
    As the country went into a selected lockdown, business confidence plummeted. To limit the economic fallout, the government announced a comprehensive package to protect jobs and businesses, its favourable budgetary position giving it sufficient firing power. Nevertheless, each month of lockdown may reduce output growth by around 2 percentage points. In the case of a rapid recovery, the GDP shrinkage could be limited to around 3.5% in 2020.
    Due to the Covid-19 virus our growth outlook declines by 5 percentage points to -3.5% for the whole of 2020, despite government measures to attenuate the impact of the epidemic. We see strong hits across almost all sectors, most notably construction and real estate related activities. Prime Minister Wilmés was empowered by a “corona coalition”, which provides a welcome if only temporary breather from government formation talks. The government so far managed this crisis in decisive fashion but eventually the bill will have to be footed.
    After what proved to be a rather mild slowdown, Portugal’s GDP growth ended up in the upper range of expectations at 2.2% in 2019. The Covid-19 pandemic will surely erase the country’s enviable performances as whole segments of the economy come to a standstill and the country sinks into a major recession in the weeks ahead. Similarly to its European counterparts, the Costa government is steadily implementing a series of measures to preserve the economic system during the crisis and safeguard the country’s capacity to recover.
    Now a global phenomenon, the Covid-19 pandemic reached the United Kingdom relatively late and did not give rise to immediate protective measures. Having initially opted for a ‘herd immunity’ strategy, Boris Johnson’s government finally decided, on 24 March, to introduce a national lockdown. As in Italy, France and indeed generally across continental Europe, people’s movements and interactions are now limited in the UK. The disease, meanwhile, has spread rapidly, on a trajectory similar to that seen in the worst affected countries. Faced with the health and economic threats created by the pandemic, the government and the monetary policy authorities have introduced an exceptional package of support.
    After the economic slowdown was confirmed in 2019, the global shock of the coronavirus pandemic will probably drive Sweden into recession in 2020. The evaporation of global demand, notably from the European Union and China, will trigger a drop-off in exports, and production channels will temporarily freeze up. Investment and consumption will both be hit. The central bank has adopted unprecedented support measures while the government is devoting its financial manoeuvring room to funding a fiscal stimulus policy that supports jobs and businesses.
    With the coronavirus epidemic and its impact on oil prices, which are plummeting, the Norwegian economy is heading for a contraction in 2020. Exports, which account for 41% of GDP, are likely to be hit first. Norway’s central bank cut its key rate to nearly zero and has considerably increased NOK and USD lending, injecting liquidity into the economy while supporting the currency. The government has introduced fiscal measures to buffer the shock for companies and households.
    The Coronavirus epidemic is also sweeping Denmark, which has now introduced relatively strict lockdown measures. With its very open economy (exports account for more than 50% of GDP), GDP growth will contract in 2020. To mitigate the shock, the government has launched major fiscal support measures, comprised notably of paying compensation for all or part of wages for a 3-month period. The central bank is ensuring DKK and EUR liquidity, after signing a swap arrangement with the ECB.
    Economic activity will plummet under the impact of the Covid-19 pandemic, but not only via the export channel. The recession could become more virulent if household consumption and production channels were also to freeze up. In addition to the ECB’s monetary policy support, the government will also try to use fiscal policy to buffer the shock and limit the decline in employment.
    24 January 2020
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    In recent months, the global manufacturing cycle has been bottoming out whereas in services a slight uptick has been noted. In addition, two major sources of uncertainty have seen a positive development: the US and China signed a trade deal and the UK and the European Union can at last start negotiations about their future relationship. Very accommodative central bank policy has contributed to buoyant market sentiment. The combination of these three factors - stabilisation of business sentiment, decline in uncertainty, supportive financial environment - implies conditions are met to see some uptick in growth. Nevertheless, caution prevails in this assessment, if only because later on this year, uncertainty may very well increase again.
    The dichotomy between economic and market trends has widened, in a context of accommodating monetary policy and rising corporate debt. Risks taken by institutional investors (pension and investment funds, life assurance companies) have increased, as has the vulnerability to any adverse shocks or changes in expectations. 2020 – an election year – is unlikely to bring calm. Welcome as it is, the truce in the trade war with China takes in the bulk of existing tariff increases, without producing any fundamental changes in the position of the US administration and its limited appetite for multilateralism.
    In 2019, economic growth slowed to 6.1%. Total exports contracted and domestic demand continued to weaken. The year 2020 is getting off to a better start as activity shows a few signs of recovering and a preliminary trade agreement was just signed with the United States. Yet economic growth prospects are still looking downbeat in 2020. The rebalancing of China’s growth sources is proving to be a long and hard process, and economic policy is increasingly complex to manage. Faced with this situation, Beijing might decide to give new impetus to the structural reform process, the only solution that will maintain the newfound optimism and boost economic prospects in the medium term.
    In December 2019, the Japanese authorities decided to launch a major fiscal stimulus for the years ahead. A large part of the programme will target disaster prevention after the country was hit by a series of natural disasters recently. The stimulus will also limit the negative impact of last October’s VAT hike, which probably strained private consumption in the year-end period. Buoyed in part by early purchases ahead of the VAT hike, household spending continued at a dynamic pace in Q2 and Q3 2019. The export sector, in contrast, was hard hit by the sluggish global environment. In 2020, public investment is expected to partially offset weak private consumption.
    Will the year 2020 be marked by a rebound in eurozone economic growth? More favourable signs seem to be emerging, although they have yet to show up clearly in hard data. In any case, eurozone growth is bound to remain low. In this environment, inflationary pressures will probably fall short of the central bank’s target. Beyond that, the ECB Governing Council will be tackling new issues in 2020. Christine Lagarde announced a strategic review for the Frankfurt-based monetary institution. On the agenda: cryptocurrencies, climate change, technological progress, and inequalities.
    Economic activity increased by only 0.6% in 2019, as the decline in manufacturing production was offset by increased activity in more domestically oriented sectors. In the coming two years, the economy will be supported by more accommodative fiscal policies. From Q2 2020, the pick-up in exports related to the partial lifting of uncertainties may more than compensate for easing consumption growth. Nevertheless, GDP growth is expected to remain below potential. The possible departure of the SPD from the ruling coalition forms a major political risk.
    The year 2020 is expected to follow along similar lines as in 2019, a mixed performance marked by slow but resilient growth bolstered by the strength of final domestic demand. The economy is expected to keep running at about the same rate (1.1% after 1.3%). The rebound in household consumption should gather steam, fuelled by major purchasing power gains. The dynamic pace of investment, which looks hard to sustain, is expected to slow, while sluggish global demand will continue to curb exports. The intensity of several external downside risks declined in Q1 2020, including trade tensions, Brexit, and fears of a recession in the US and Germany. On the domestic front, upside risks continue to stem from supportive economic policies while the tense social climate constitutes a risk on the downside.
    Italy continues to record a cycle of subdued activity, with the annual growth rate of real GDP slightly above zero, as a result of the feeble growth in services, the modest recovery in construction and the persisting contraction in the industrial sector. From Q1 2018 to Q3 2019, manufacturing production has fallen by more than 3%, with the strongest declines in the sector of means of transport, in that of metal products and in that of textile, clothes and leather items. Together with the short term slow down, Italy is going to face long term challenges due to the ageing population and its impact on the labour force and the pension spending.
    Although Spanish growth remains solid, it is by no means sheltered from the European slowdown. In 2020, growth is expected to continue slowing to about 1.7%, after reaching 2% in 2019. The slowdown is also beginning to have an impact on the labour market. From a political perspective, Pedro Sanchez was the winner of November’s legislative election, although he failed to strengthen the Socialist party’s position. He was invested as a prime minister in early January by Parliament and he will lead a minority coalition government alongside the extreme left Podemos. The coalition will depend on the implicit support of some regional and nationalist parties, notably the pro-independence Catalan ERC party.
    Economic activity may have substantially weakened in Q4, due to the slowdown in world trade and the nitrogen and PFAS problems. Fiscal policy should become very accommodative, although it remains doubtful if the government will succeed in implementing all the spending plans. Growth is likely to slow this year, before picking up in 2021 on the back of a stronger global economy. However, climate challenges and labour shortages continue to weigh on activity in particular in construction. Moreover, pensioners may face severe cuts because of the deteriorated financial situation of the pension funds.
    Belgian GDP growth is expected to drop to 0.8% in 2020, down from 1.3% in 2019. Domestic demand remains the key engine of growth, partially offset by a negative contribution from net trade. Private consumption growth is reduced as employment increases now at a slower pace, after 4 strong years. Investment growth is up, spurred on by public expenditures. The lack of a majority-backed government contributed to renewed fiscal slippage, which remains a key risk for the Belgian economy.
    Supported by catching-up effects, the Greek economy managed to accelerate slightly despite a slowing European environment. Confidence indices have improved strongly and the Greek state has successfully returned to the capital markets. The new centre-right government is seeking to cut taxes on labour and capital without sacrificing fiscal discipline. The recovery will be a long process, but it is on track.
    On 31 January 2020, the United Kingdom will officially leave the European Union and all of its constituent institutions. Brexit will therefore happen in law if not in fact, as, during a so-called ‘transition’ period set to end on 31 December 2020, the British economy will remain a full part of the single market and the European customs union. Goods, services and capital will continue to move freely into and out of the EU, which will continue to have legal and regulatory authority. True separation will only come at the end of this period, once the framework of the future relationship has been settled. As has been the case for some time now, this final step does not look easy to achieve.
    GDP growth slowed sharply in 2019, and this trend is expected to be confirmed in 2020. Uncertainty surrounding the business climate and international trade are straining exports and investment. Consumption is barely rising and is unlikely to revitalize growth. Despite this environment, and with inflation near the central bank’s 2% target rate, the Riksbank opted to raise its key policy rate from -0.25% to 0%. Even so, monetary policy is still accommodating.
    In a less buoyant international environment, Denmark’s small open economy managed to maintain a rather dynamic pace. Thanks to its sector specialisation (pharmaceuticals, digital, etc.), the economy has been fairly resilient despite the downturn in the global manufacturing cycle. A labour market verging on full employment and accelerating wage growth have bolstered consumption, which is still one of the main growth engines. With the Danish krone (DKK) pegged to the euro, the central bank’s monetary policy will follow in line with ECB trends, and is bound to remain very accommodating. Fiscal policy will be geared towards the ecological targets of reducing greenhouse gas emissions.
    10 October 2019
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    The slowdown of global growth has gathered pace, forcing the Federal Reserve to cut the federal funds rate on two occasions, whereas the ECB has announced a comprehensive easing package. Nevertheless, the slowdown is expected to continue. Uncertainty is pervasive. Companies question the true state of demand faced with slower growth, trade disputes, Brexit worries, geopolitical risk. Corporate investment suffers and may impact households via slower employment growth. The room to boost growth via monetary policy and, in many countries, fiscal policy has become limited, and this is another factor which could weigh on confidence. Surveys of US corporate executives point towards high concern about recession risk and the US yield curve inversion adds to the unease. However, the picture provided by a broad range of leading indicators is, at least for the time being, less bleak.
    The contraction in world trade, exacerbated by President Trump’s tariff offensive against China, has begun to spread to the United States. The economic slowdown, which can also be attributed to domestic factors, has prolonged throughout the summer of 2019, and business surveys do not suggest any improvements in the months ahead. Corporate investment will remain downbeat, while household consumption, which has been resilient so far, should begin to falter. In the face of this environment, the Federal Reserve -- which no longer provides forward guidance on upcoming policy moves – is bound to lower its key rates again.
    Since Q2 2018, Beijing has let the yuan depreciate against the dollar each time the US has raised its tariffs on imported goods from China. Yet, exchange rate policy as an instrument to support economic activity should be used moderately in the short term. There is also little room to stimulate credit given the excessively high debt levels of the economy and the authorities’ priority on pursuing efforts to clean up the financial system, the public sector and the housing market. Torn between stimulating economic growth and deleveraging, the authorities’ dilemma could get worse if recent fiscal stimulus measures do not have the intended impact on domestic demand, or if the external environment were to deteriorate further.
    Japanese GDP growth was stronger than expected in early 2019. Despite the current troubles in the export sector, for the moment domestic demand - both public and private - is picking up the slack. In the short term, two sources of concern loom over Japan’s macroeconomic scenario. First, Japan is highly exposed to the slowdown in both the Chinese economy and international trade. Second, the VAT increase in October will curb consumption during the year-end period and possibly in 2020 as well. Faced with these internal and external uncertainties, Japan will maintain accommodative monetary and fiscal policies, the effectiveness of which remains to be seen.
    At its September monetary policy meeting, the European Central Bank delivered a strong message. Through the broad mobilisation of its unconventional monetary policy tools, it aims to fulfil its mandate and reach its inflation target. At the press conference following the meeting, Mario Draghi seized the occasion to reiterate his call on certain eurozone governments to increase their fiscal support. The ECB is entering a long period in which it will have to remain mute, passing on the baton to the member states with comfortable fiscal leeway. This new round of monetary support is welcome considering the economic troubles facing the eurozone, although there are some doubts about its effectiveness.
    Weak data and business cycle indicators suggest that German economy would be in a mild technical recession. The weakness is mainly in the manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.
    The French economy continues to show proof of resilience judging from the stability of its GDP growth?–?at an annualised rate of just over 1%?–?and the relatively strong showings of confidence surveys and of the labour market. Although prospects are still favourable, the horizon has darkened in recent months with Germany showing signs of recession, the escalation of trade tensions and lingering uncertainty over Brexit. We expect business investment and exports to decelerate sharply under the weight of a more uncertain, less buoyant external environment. Yet the slowdown is likely to be offset by the expected rebound in household consumption, supported by major fiscal measures to boost household purchasing power.
    The new Government has approved the update of the economic and financial document, planning to raise the deficit to 2.2% of GDP in 2020. The 2020 Budget Law is estimated to amount to EUR 30 bn. Some measures contained in the budget, such as the cut of the fiscal wedge, are expected to sustain the economy with a positive effect on growth, despite an increasing uncertainty. In Q2, GDP increased by 0.1 y/y, as stocks negatively contributed to the overall growth, while exports continued to rise. Domestic demand suffered from the mixed evolution of labour market and the further delay of the full recovery of the housing market.
    Spanish voters will be called back to the ballot box on 10 November, but there is no certainty that the election results will pull the country out of its current impasse. The political landscape is still too fragmented to produce a lasting coalition. The line to follow in the face of Catalan independentism only exacerbates the divisions and helps justify the lack of co-operation. Meanwhile, growth has slowed somewhat more sharply than originally expected, although it is still holding around 2%, a performance that would be welcomed by many of the other big European economies. The elaboration and adoption of the 2020 budget bill will have to wait until a new government is formed.
    Belgian GDP growth is expected to come down from last year’s 1.4% to a mere 1% in 2019 and 0.7% in 2020. This reflects a further slowdown in international trade, which is only partially offset by resilient domestic demand. Despite a slowdown in job creation, a pickup in disposable income spurs on private consumption well into 2020. Public finance remains a key risk-factor with government debt in excess of 100% of GDP. Further fiscal slippage seems almost inevitable with government formation talks not yet near a conclusion.
    After its electoral success in late September, the conservative party (ÖVP) is expected to form a new government. To obtain a majority, the party could turn again to the FPÖ (far right). In that case, policies should remain largely unchanged and focus on fiscal consolidation and the reduction of the tax burden. The next government will face a less favourable economic environment. GDP growth could decelerate to around 1.2% in 2020. Nevertheless, public finances have improved considerably, giving the government sufficient leeway to fight a recession, if necessary.
    The economic slowdown has been very gradual so far, but it is expected to progressively spread during the second half of 2019 and in 2020. With unemployment at the lowest rate since 2002, households remain confident and have just renewed their confidence in Prime Minister Costa’s administration. After winning the legislative elections of 6 October with more than 36% of the vote, the Socialist party is preparing to form a new government with the support of the other left-wing parties.
    Finnish growth had only just regained some momentum in 2015 before slowing again in 2018. GDP growth is expected to weaken further in the quarters ahead. The country’s openness to trade exposes it to the deterioration of the global economic environment. Slower export growth and uncertainty linked to protectionist policies will undermine investment. Households, in contrast, should benefit from stronger wage growth. The unemployment rate has fallen to the lowest level since year-end 2008, and should continue to decline despite the slower pace of job creations.
    As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK is heading? Probably not the Prime Minister itself, Boris Johnson, who lost his majority in the House of Commons in an attempt to suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general election.
    The Norwegian economy is expected to report robust GDP growth through the end of 2019, thanks to dynamic oil sector investments in Norway and abroad. Growth is expected to slow thereafter in a less favourable international environment. Moreover, investment in the Norwegian oil sector is expected to ease up in 2020. However household consumption should continue to grow at a relatively sustained pace, buoyed by wage acceleration. The central bank of Norway will not opt for any further rate increases in the quarters ahead. Inflation should hold near the central bank’s target of 2%, while external risks are on the rise.
    10 July 2019
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    A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
    Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
    With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
    Although Japan’s economic openness is relatively limited, the high concentration of Japanese exports to China, and the other Asian countries in general, creates a major external risk for the dynamics of Japanese growth. This situation is squeezing the manufacturing sector, but for the moment, its difficulties do not seem to have carried over to the other sectors of the economy. The VAT increase planned for October should encourage households to make some early purchases, while the high level of uncertainty is hampering corporate investment. In this environment, the Bank of Japan is expected to maintain a very accommodating monetary policy, although this is unlikely to trigger a sustainable upturn in price inflation.
    The months pass but nothing seems to change. Growth in the manufacturing sector is struggling to accelerate in a persistently uncertain international environment, while buoyant domestic demand is boosting activity in services. The stronger-than-expected first quarter performance sends a more optimistic message than economic surveys. Faced with a downturn in inflation expectations and the downside risks to the Eurozone’s economic scenario, the European Central Bank (ECB) has been proactive again. It is prepared to ease monetary policy further and the new measures have been set up much earlier than expected. Yet faced with stubbornly mild inflation and only limited manoeuvring room, the ECB is bound to take a frugal approach.  
    As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.
    The signs of stabilisation seen at the beginning of the year have been followed by improvements in confidence surveys. The upturn in consumer confidence has been the most marked and the most encouraging of these. The rather more mixed nature of the economic data available tempers these positive signals somewhat, and leads us to forecast stable growth in Q2, at 0.3% q/q, making this the sixth quarter in a row to see growth at around this pace. This stability, which is remarkable in and of itself, is likely to continue over the coming quarters according to our forecasts. It is a good sign of the resistance of French growth to downward pressures. Under our scenario, this resistance demonstrates a degree of effectiveness in the measures taken to support consumers and businesses.
    In Q1 2019, Italy came out of recession. The overall scenario remained mixed. The GDP annual growth rate was negative. Imports strongly declined and exports slightly increased, with a positive contribution of net exports. Both households and firms remained cautious, postponing consumption and investment. Cyclical indicators suggest a disappointing evolution in coming months, making more challenging the fulfilment of public finance objectives. The Italian Government approved an update of the 2019 Budget, with the public deficit around 2% of GDP, reaching an agreement with the European Commission and avoiding the disciplinary procedure.  
    Spanish growth is still robust, but that does not mean it is totally immune to the European slowdown. Although growth is expected to slow this year, it should have no trouble holding above an average annual rate of 2%. After winning April’s legislative elections, Pedro Sanchez is still seeking a majority that would enable him to head the executive branch and form a new government. Spain officially exited the European excessive deficit procedure recently. Although a budget has not been formally adopted for 2019, the authorities are aiming for a primary surplus.
    GDP growth is slowing due to the strong deceleration in global trade. Nevertheless, the economy continued to operate close to its potential until 1Q 2019 thanks to the strength of domestic demand, underpinned by strong disposable income growth and an expansionary fiscal policy. As the government has lost its majority in the Senate, it needs the cooperation of the opposition parties for passing new legislation. However, a government crisis is not imminent. Even if GDP growth is expected to slow below its potential in the coming quarters, public finance metrics will continue to improve up to 2020.
    Over the next quarters economic growth will remain stable. Rising labour market capacity constraints and a lower contribution by net international trade are weighing on the overall outlook. With also uncertainties in the international (trade war, Brexit) and national (government formation talks) context unlikely to dissolve anytime soon, our base case is one of below potential growth up until 2020.
    The economic recovery continues. Growth is accelerating and for the moment it has reached the lower range of expectations. After four and a half years in power, Alexis Tsipras passes on the helm to Kyriakos Mitzotakis, leader of the centre-right New Democracy party, which has led in the polls since 2016. The new Prime Minister is unlikely to call into question the prescribed public finance trajectory as the country exits the European financing programme.  
    Brexit has been behind thirty-seven resignations from the government responsible for managing the process, the latest being that of Prime Minister Theresa May herself. Having failed three times to get the Withdrawal Agreement through Parliament, she had little choice but to ask for an extension of the Article 50 period and then in the end to resign. The two candidates to take her place are the current Foreign Secretary, Jeremy Hunt, and his predecessor, Boris Johnson. Whilst Mr Johnson claims he can negotiate a changed deal and trigger Brexit from 31 October 2019 (the latest deadline), Mr Hunt plans to seek more time in order to renegotiate to allow for an orderly exit.
    The robust GDP growth reported in 2018 is bound to slow this year. Sweden’s main trading partners have been hit by slowdowns, which is having a negative impact on export momentum. The slowdown in job creations will also strain household consumption. Yet it is the reduction in residential investment that is expected to curtail economic activity sharply in the months ahead. Although inflation should near the central bank’s 2% target by the end of the year, monetary policy will probably remain accommodating in the months ahead due to the uncertainty surrounding economic trends.
    Denmark’s small open economy is bound to be hit by the economic slowdown affecting its main trading partners in the quarters ahead. Household consumption will remain the main growth engine thanks to job creations, wage growth and mild inflation. With consumer prices up only 0.7% y/y in May, inflation should remain mild. The Danish economy is also expected to benefit from an accommodating monetary policy in the quarters ahead, although this will depend on the policy stance adopted by the European Central Bank (ECB).
    19 April 2019
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    Recent data in China and the eurozone point towards a stabilisation of growth and have been met with relief. Although the US economy is slowing, growth should remain at a satisfactory level in the near term. Yet there are lingering concerns about the underlying strength of the global economy. The IMF has again scaled down its forecasts and only expects a modest growth pickup later this year. The flattening of the US yield curve fuels worries that growth will disappoint. The Fed insists it is confident about the outlook and patient in setting its policy. Markets have welcomed this accommodative message. Yet the signals sent by equity and bond markets about future growth are quite different. It only adds to the list of concerns.
    Although losing steam, the economic activity in the US is seen keeping on a rather dynamic path in 2019. The International Monetary Fund still forecasts a 2.3% increase in GDP this year, while delivering an increasingly cautious message in the meantime. The IMF recently pointed out several risk factors, including the record high corporate debt ratio, the opacity and less stringent standards on the leveraged loan market, and stretched equity market valuations. Moreover, the inversion of the yield curve is virtually complete, which in the past has always been an early-warning sign of recession.
    The eurozone’s manufacturing sector has been hard hit by the decline in foreign trade and persistently high uncertainty. Very open internationally, the eurozone is sensitive to global cyclical slowdowns. Internal macroeconomic fundamentals are still solid, and the rally in the services sector is showing resilience. The ECB has taken note of the longer than expected slowdown, and has opted once again for longer-term refinancing operations (TLTRO). Numerous risks still cloud the forecast horizon, which could darken rather quickly if any of these risks were to materialise.
    Since the middle of 2018, economic activity has virtually stagnated largely because of a slowdown in world trade. The most recent surveys and hard data confirm that weakness in the manufacturing sector continued in Q1 2019. Spearhead of the economy, the sector can become a source of vulnerability when world markets are less buoyant. However, Germany is able to support domestic demand. In 2019, the government will return to households and businesses a part of last year’s record budget surplus (more than EUR 50 bn).
    Business confidence surveys are showing signs of levelling off. Hard data for January and February are rather positive. These factors are consistent with the economy keeping up growing at about 1.2%, which is our growth forecast for 2019. Although this is not very high, it is synonymous with the resilience the French economy is expected to show in an environment marked by uncertainties and downside risks. The main factor behind this resilience is the positive impetus of economic and fiscal policy, notably stimulus measures to boost household purchasing power, and the expected ensuing rebound in household consumption.
    The Italian economy entered the third recession in the last ten years. In 2018, value added in the manufacturing sector recorded four consecutive contractions. Domestic demand disappointed, as both households and firms remained extremely cautious. Given the deterioration of the overall scenario, in the 2019 Economic and Financial Document recently approved, the Italian Government has lowered from 1% to 0.2% the GDP growth expected in 2019, with public deficit at 2.4% and the debt to GDP ratio at 132.6%. The structural deficit would worsen by 0.1%, to 1.5%. A progressive ageing of the population makes the scenario even more complicated.
    In a morose economic environment, Spanish growth stands out as one of the most resilient in the eurozone, and it seems to have entered the year at a very similar pace to the one in H2 2018. The main factors behind this resilience can be found on the household front, where the savings rate has dropped back to the low point of 2008. With only a few days to go before the 28 April general elections, the electoral landscape is still highly fragmented. Regardless of the outcome, the winning party will find it hard to form a sustainable majority coalition.  
    Industrial enterprises were squeezed by tighter financing conditions in 2017 and early 2018, and then hit by a slowdown in production and revenue growth last year. These troubles have contributed to the deterioration of their payment capacity, resulting in a surge in defaults in the local bond market. The increase in defaults is an indicator of the financial fragility of corporates, and also seems to be going hand-in-hand with greater differentiation of credit risks by lenders and a certain clean-up of the financial sector. These trends are expected to continue in the short term as the authorities conduct a targeted easing of monetary policy. However, the persistence of the debt excess in the corporate sector will maintain high credit risks in the medium term.
    After nearly five years in power, Narendra Modi’s track record is generally positive, even though the last year of his mandate was tough, with a slowdown in growth in Q3-2018/19. The main growth engines are household consumption, and more recently, private investment, thanks to a healthier corporate financial situation, with the exception of certain sectors. In full-year 2018, external accounts deteriorated slightly as a swelling current account deficit was not offset by foreign direct investment. A big challenge for the next government will be to create a more conducive environment for domestic and non-resident investment.
    The hopes of seeing economic activity pick up following the election of Jair Bolsonaro have fallen. Some indicators point to a possible contraction in economic activity in Q1 2019 at a time where confidence indicators were seemingly improving. Meanwhile, the reform of the pension system – a cornerstone of President Bolsonaro's economic program – was presented to Congress in February where it is currently under discussion. Negotiations will likely be more protracted and be more difficult than originally expected. Indeed, since taking office, the popularity of the Brazilian president has sharply declined and relations between the executive and the legislature have strained.
    Economic growth slowed in the first months of 2019, and is now close to its potential growth rate of 1.5% according to the central bank. A 2-point VAT increase on 1 January has strained real wage growth and sapped household consumption. Inflation (5.2% year-on-year in February) is still below the central bank’s expectations, and the key policy rate was maintained at 7.75% following the March meeting of the monetary policy committee. In the first two months of 2019, investors were attracted by high yields on Russian government bonds, despite the risk of further tightening of US sanctions. The rouble also gained 5% against the US dollar in Q1 2019.
    Economic activity in Japan remains in a slump, and the slowdown observed in 2018 seems set to last. Manufacturing activity deteriorated in the first quarter. In the short and medium term, Japan will continue to be hard hit by the slowdown in China, its main trading partner. Demographics are still a major problem in a country where the over-65 age group continues to swell and now accounts for more than a quarter of Japan’s total population. It serves as a constant incentive to boost productivity gains through large-scale structural reforms in the goods and services markets as well as in the labour market.
    By opting to leave the European Union (EU) without any exit plan, the United Kingdom has come face to face with an impossible choice. Week after week, the Brexit impasse has revealed the British Parliament’s incapacity to make decision, starting with the ratification of the divorce terms, the fruit of 2-years of negotiations by Prime Minister Theresa May. In the end, the Brexit was simply postponed. First set for 29 March, then 12 April, the deadline for exiting the EU has now been extended to 31 October (a Halloween treat?). This date could be moved forward if the UK finally manages to ratify the withdrawal agreement, which it has rejected time and again. But the most probable scenario is that the UK will extend its participation to the EU, at least for a while…
    24 January 2019
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    The slowdown is spreading widely. Although it is reasonable to expect growth to normalise, several sources of uncertainty (fears of a trade war, Brexit, the US government shutdown, etc.) are acting as headwinds. China has already announced new measures, and in the United States, the Federal Reserve is insisting on its patience (concerning inflation) and flexibility when it comes to adapting monetary policy.
    The assumption that the US economy is heading for a landing is gaining ground, not just because of the shutdown. The disruption created by the trade war with China, the appreciation of risk on bond and equity markets, the peaking of the energy sector and the deterioration of real estate indices all suggest less buoyant growth. This view is shared by the US Federal Reserve, which has adopted a more cautious tone and suspended the increase in policy rates pending future macroeconomic data.
    After an eventful first twenty years, the eurozone is moving into a new phase of uncertainty. Growth has slowed markedly, and economic indicators have deteriorated. With temporary shocks and structural drags on growth, 2019 brings numerous risks. Against this background, and faced with underlying inflation that remains too low, the European Central Bank (ECB) is taking a cautious approach to this new year.
    Economic growth has slowed markedly since the second quarter of 2018 and business surveys indicate that it is unlikely to change in the coming months. The exporting manufacturing sector is much affected by the slowdown in world trade. In the coming quarters, the domestic economy is likely to become the major engine behind growth thanks to an expansionary fiscal policy. More fiscal stimulus could be expected if the economy would slow further. This would also shore up the chances of the coalition parties at the next federal election set for 2021.
    2019 is getting off to a less strong start, with economic activity having taken a hit from the ‘gilets jaunes’ protest movement. The collapse in consumer confidence has been abrupt and the global environment looks less certain. Against this background, fiscal policy is being loosened: the new plan to support the purchasing power of lower income households, announced in response to December’s demonstrations, should help consumer spending to catch up, at least in part. It comes alongside measures already introduced in the 2018 budget to support consumers and companies. French growth is therefore likely to show signs of resistance.
    At the end of 2018, Italy and the European Commission agreed on a new 2019 Budget Law, avoiding an Excessive Deficit Procedure. The 2019 public deficit has been lowered to 2% of GDP from 2.4% previously planned, and real GDP growth has been revised downward to 1% from +1.5%. This is still a challenging scenario as overall conditions in the Italian economy worsened in H2 2018. In Q3, GDP fell by 0.1% as investment, both private and public, significantly declined. After the downturn in September, exports in Italy recorded a +9.6% y/y increase in October, while they stagnated in November bringing the value of the sales abroad to 427 billion euros in the first eleven months of the year.
    The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive, especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit the excessive deficit procedure that was launched 10 years ago.
    Economic growth slowed to 6.6% in 2018 from 6.9% in 2017 and should continue to decelerate in the short term. The extent of the slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.
    India’s economic growth slowed between July and September 2018, hard hit by the increase in the oil bill. The sharp decline in oil prices since October will ease pressures, at least temporarily, on public finances and the balance of payments, and in turn on the Indian rupee (INR), which depreciated by 9% against the dollar in 2018. In a less favourable economic environment, Narendra Modi’s BJP party lost its hold on three states during recent legislative elections.
    The election of Jair Bolsonaro at the presidency of Brazil has marked a swing to the right, the weakening of traditional political parties and a return of the military to national politics. The new administration faces the challenges of rapidly engaging its fiscal reform, gaining the trust of foreign investors while reconciling ideological differences across its ranks. How society will adjust to a new era of liberal economic policy remains the greatest unknown. Meanwhile, the economy is still recovering at a slow pace. Supply-side indicators continue to show evidence of idle capacity while labour market conditions have yet to markedly improve. Sentiment indicators have shown large upswings in recent months which should help build some momentum in economic activity over Q1 2019.
    In 2018, Russia swung back into growth and a fiscal surplus, increased its current account surplus and created a defeasance structure to clean up the banking sector. The “new” Putin government affirmed its determination to boost the potential growth rate by raising the retirement age and launching a vast public spending programme for the next six years. Yet the economy faces increasing short-term risks. Monetary tightening and the 1 January VAT increase could hamper growth. There is also the risk of tighter US sanctions, which could place more downward pressure on the rouble.    
    On 15 January 2019, UK MPs rejected the proposed Brexit agreement reached by EU Heads of State two months earlier. With 432 of the 634 votes going against the deal, this result has significantly weakened Prime Minister Theresa May in future discussions with the EU and with Members of Parliament. Today almost anything looks possible, starting with a delay in the official date of the UK’s departure, currently scheduled for 29 March.
    The COP24 only succeed in agreeing on rules on measuring, reporting and verifying carbon emissions. In the meantime, the world is falling behind the objective to limit global warming to 1.5°C. CO2 emissions are set to rise to 2030, whereas they should peak by 2020. Countries are underestimating the urgency for action or held back by commercial interests. Moreover, environmental legislation is met by growing public resistance. It demands a better framing of climate policies. Moreover, the climate change discussion should be broadened to the WTO.
    18 October 2018
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    Growth has eased during the course of this year with the US being the major exception largely thanks to fiscal stimulus. The ensuing cyclical desynchronization has caused a broad-based appreciation of the US dollar, in particular versus emerging currencies. In some cases (Argentina, Turkey), the depreciation has been considerable due to country-specific developments. Global growth should continue to ease further next year and lead to a certain resynchronization: the impact of the US fiscal boost will wane, Fed tightening should start to have an effect and corporate investment is expected to slow, which in turn should weigh on world trade growth. Even in the absence of additional tariff increases, fears of more tit-for-tat measures could sap business confidence.
    With the approach of US mid-term elections, the Trump administration is doing a lot to deliver economic stimulus, through historic corporate tax cuts, increased military spending and financial support to farmers, which are the first collateral victims of the trade war with China. These actions are weighing on the Federal budget deficit, which reports one of its biggest increases ever outside of a recession. The trajectory of public finances seems hardly sustainable, while the rapid expansion of the economy could be also at risk. The full employment of capacities, the peaking of corporate debt ratios and high equity market valuations are all early warning signals of a slowdown, that could materialize as soon as 2019.
    Growth has been moderating in 2018, although remaining above potential. Prices pressure are increasing as signalled by high levels of capacity utilisation, declining unemployment and rising wages. As underlying inflation is projected to move towards the ECB’s 2% ceiling, the central bank decided to reduce net asset purchases and possibly halt them from January 2019. Policy rates will remain unchanged at least through the summer of 2019. The policy mix should stay expansionary and GDP growth may moderate towards its trend rate in 2019.
    Growth decelerated sharply in 2018, although remaining about potential. Tensions in the labour market have resulted in generous pay deals. Nevertheless, underlying inflation has remained subdued. Despite the mildly expansionary fiscal stance and very easy monetary conditions, the pace of economic growth may decelerate further in 2019 due to a worsening external environment. Labour market shortages may intensify in particular in the construction sector. The increase in unit labour costs will gradually spill over into higher consumer prices. Political tensions may intensify, but the prospect of defeat may be the glue that holds the coalition together.
    After a market soft patch in the first half of 2018, growth in France will probably get some colour back in the second part of the year, despite a less supportive external economic environment. Consumer spending should get a boost from tax cuts and increases in social minima planned for the end of the year. This positive impact is expected to last into 2019, buffering the growth slowdown. Other fiscal stimulus measures will also be at work, and the first results of the labour market reforms and the ‘PACTE’ growth and business reform act could start to show up.
    Economic activity has further decelerated. In Q2 2018 GDP slowed to 1.2% y/y. Also, the full recovery of the housing market is further delayed, as real estate prices decreased by 0.2% y/y in Q2. According to the draft budget, the deficit-to-GDP ratio is expected to stay at 2.4% in 2019 and then decline below 2% in 2021. In the government scenario, GDP would increase by around 1.5% in the coming three years, allowing the debt-to-GDP ratio to diminish to 126.7% in 2021.
    Activity is unlikely to pick up again after sluggish growth in the first half of the year. Jobs are, however, still being created at a solid pace, cushioning possible spill-over effects from the weakening external environment. Corporate investment remains rather slow, partly because of geopolitical tensions. The budget stance remains too accommodative, as further fiscal consolidation seems rather unlikely, given the upcoming federal elections in May 2019. Growth is projected to slow to potential and inflation could decline to 1.5% by end 2019.
    Although the Greek economy continues to recover, so far its performance has fallen somewhat short of expectations. After exiting the European financial assistance programmes, Greece’s executive arm has regained some freedom to act, although it is still under “enhanced supervision”. Finding the right trade-offs will be no easy task, between turning around domestic demand, maintaining competitiveness gains and consolidating public finances over the long term, especially with just one year to go before the next legislative elections.
    The Chinese authorities have responded to the economic slowdown and US trade barriers by loosening monetary policy and letting the yuan depreciate in recent months, while considering fiscal stimulus measures. With policies to boost demand, the economic growth slowdown is likely to continue at a moderate pace in the short term. Any rebound in investment, however, is likely to be limited, restricted by the deterioration of export prospects, corporates’ excessive debt, industrial restructuring measures and Beijing’s determination to promote healthier development in the real estate market. As to private consumption, it may not be strong enough to pick up the slack.
    Pressures have been on the rise since April 2018. Narendra Modi’s power has eroded. His party lost its majority position in the lower house of parliament. Growing difficulties in the financial sector have sparked higher refinancing costs. Despite solid growth in the first quarter of fiscal 2018/2019, the rupee has fallen to the lowest level on record after depreciating by more than 13% against the USD. India is vulnerable to higher oil prices (23% of imports) and capital outflows. Although its external position has weakened, India is nonetheless in a much more comfortable position than it was five years ago. At the end of September, foreign exchange reserves still covered 1.4 times its short-term external financing needs (less than 1 year), compared with 0.9 times in 2013.
    The economic, political and moral crisis that has held Brazil in its thrall for several years has crystallised in general elections that have seen a section of the electorate swing to the right. The Roussef and Temer presidencies – marred by corruption scandals and two years of deep recession in 2015 and 2016 – have provided a fertile ground for a further fragmentation of Brazil’s political landscape. The swinging of the political pendulum risks increasing social tensions at a time when the macroeconomic environment deteriorates as growth loses steam, investment contracts, government debt builds up and the external environment looks increasingly uncertain.
    Despite the improvement in economic fundamentals (strong rise in the current account surplus, accelerating GDP growth and a fiscal surplus), the rouble depreciated by 13% against the dollar between April and September 2018. Tighter US sanctions in April and again in August 2018, combined with the threat of new sanctions this fall, triggered massive capital outflows. Despite a highly volatile rouble, bond and money market pressures have been mild. To counter the downside pressure on the currency, the Russian central bank raised its key rates in September, for the first time since 2014, and halted its foreign currency purchases on behalf of the finance ministry.
    On 29 March 2019, the European Union and the United Kingdom will officially separate. Yet the terms of the separation have yet to be worked out. The Withdrawal Agreement, which is indispensable for a smooth exit, calls for a transition period of a little less than two years, through the end of 2020. It will to be discussed at the 18 October European Council meeting. Agreement on the divorce terms has always run up against the Northern Ireland question. Assuming the European heads of state and governments can solve this issue and a deal is finally reached, it would then be up to the UK Parliament to give its consent. This surely poses the greatest threat to a smooth Brexit.
    11 July 2018
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    Growth assumptions for the world economy remain at a high level in 2018 underpinned by a powerful combination of job creation, rising company profits and easy access to financing. Yet sources of concern have multiplied and others have become far more intense, leading to a sentiment of increased uncertainty. This is predominantly related to politics and economic policy, which leaves room for positive surprises, but if nothing changes, it could also result in ever stronger headwinds for consumer spending, business investment and international trade.
    President Trump’s trade war is becoming more real by the day. Citing national security concerns, the United States imposed aluminium and steel tariffs on its main trading partners in June. Retaliations followed, prompting the White House to decide further sanctions, first against China. The risk of escalation has never seemed so high, and clouds are beginning to loom over world trade. After applauding President Trump’s tax cuts, the equity and corporate bond markets are showing increased nervousness. So far, the US economy is maintaining momentum, but recent cyclical indicators are less euphoric.
    The slowdown in eurozone growth seems to fit within the “normal” progression of the economic cycle. After a period of strong growth, it is not surprising that activity returns to a pace more in keeping with fundamentals. In this environment, the normalisation of growth marks the beginning of the normalisation of monetary policy. But this should take quite some time. The ECB has already announced that it does not intend to raise key rates before summer 2019. The convergence of inflation with the central bank’s target will still require a high level of monetary support.
    Economic activity has slowed in the first half of the year. Business cycle indicators, on a declining trend since late 2017, have lately shown signs of stabilisation. They still point to robust growth, supported by rather accommodative monetary and fiscal policies. Economic growth is increasingly hampered by capacity constraints in particular in construction. Moreover, generous wage settlements and the lack of skilled workers will stimulate the offshoring of production capacity. Inflation should gradually increase due to higher production costs.
    In the first part of 2018, several factors undermined French growth, including temporary ones like tax increases and transport strikes, and imponderables, such as the upward pressure on oil prices. In the second half, growth is expected to accelerate again as domestic support factors regain the upper hand (healthier job market, planned tax cuts, and favourable financing conditions and economic policy). Dynamic world demand is another, more uncertain part of our central scenario, which places downside risk on our growth outlook of an average annual rate of 2% this year.
     At the beginning of 2018 the Italian economy decelerated. Real GDP rose 0.3% with negative contributions from both net exports and investment. Household consumption increased, supported by the recovery in the labour market. In Q1 2018, employment in Italy returned to its pre-crisis level thanks to the increase in the number of dependent employees. During recent years, the state of public finances has improved. In 2017, the public debt-to-GDP ratio fell to 131.8%. The new government have presented a detailed programme with the simplification of both fiscal and pension systems and the introduction of universal income support. The new minister of treasury stated that the new measures will be consistent with the goal of reducing the debt-to-GDP ratio. 
    The outlook is good. Although economic growth is no longer accelerating, it remains strong and is pushing down unemployment. The only cloud on the horizon is the slow pace of fiscal consolidation. That is less a deliberate policy than the result of difficulties experienced by minority governments since the end of 2016. Pedro Sanchez’s government was brought to power by a diverse majority, and could have at least as much trouble as its predecessor in implementing its policies. In the circumstances, we would not be so surprised if an early general election takes place before the scheduled date in 2020.
    Beijing is worried about the economic slowdown and its effects on the financial health of Chinese corporates. Domestic demand growth is weakening and the external environment is worsening, notably because of protectionist measures taken by the US. The authorities are adjusting their economic policy accordingly. They have slightly loosened monetary conditions, without changing their objective of cleaning up the financial sector and state-owned enterprises. They have also let the yuan lose 5% against the dollar in the last three months. It is now essential for the yuan’s depreciation to remain under control, in order to avoid any dangerous capital outflows and further pressure on the currency, as seen in 2015-2016.
    India has not been spared from the mistrust of international investors since April, even though growth has accelerated strongly. At a time of rising inflationary pressures, the central bank raised its key rates in June for the first time since 2014. This monetary tightening combined with the troubles reported by state-owned banks could strain the recovery of corporate investment, even though companies are in a better financial situation. Banks, in contrast, have accumulated financial losses of more than USD 9 bn following rule changes for the classification of credit risk. These losses account for nearly 75% of the amount of government injections into the banking sector in fiscal year 2017/2018.
    The recession is over, although there are signs that the recovery is flagging. Brazil has avoided a financial crisis. However, the fiscal situation remains very worrying and there is still a crisis of a political, social and even moral nature, with a general election also coming up in October. Against a background of emerging-market tension since March, international investors are worried that the next Brazilian administration might move away from the reform agenda. On the positive side, Brazil has addressed its macroeconomic imbalances – other than its fiscal ones – while its banks are solid and private-sector agents have deleveraged.
    Economic activity rebounded in Q1 2018 and the outlook for growth is still upbeat. Household consumption is expected to boost activity in the second half of 2018, bolstered by higher real revenues. Yet inflationary pressures could intensify with the rouble’s depreciation and the prospects of a 2-point VAT hike in January 2019. A gradual increase in the official retirement age starting in 2019 should help offset some of the structural constraints hampering growth potential, by increasing the share of the active population and reducing spending allocated to financing the pension fund deficit.
    Growth suffered from harsh winter weather at the start of the year and may have caught up slightly in the second quarter. However, the UK growth could slow down further because of the prospect of trade conflict with the United States, along with Brexit uncertainties. The UK is still struggling to turn the agreement in principle about the terms of its exit from the European Union into practical legal provisions. In the circumstances, it is very hard to predict exactly when the upcoming rate hike will take place, despite high inflation and a very low unemployment rate.
    The economic upturn continues even though growth peaked in 2017 at the highest level in 15 years. Growth is still higher than its long-term potential, and is expected to hold above 2% in 2018. The labour market is very dynamic, although the size of job creations also reflects weak productivity gains. The banking and public finance situations are improving steadily. Under this environment, Portugal gradually regains favour with the main rating agencies. Compared to the first months of 2017, the easing of sovereign rates has been spectacular.
    16 April 2018
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    High confidence levels, a global economic upswing, cautious central banks, sustained job creation and companies’ stepped up investments: enough reasons to feel comfortable when assessing the outlook for world economic growth. Yet a feeling of unease has been on the rise in recent weeks. The softening of sentiment indicators confronts us with the question of what happens after the peak. Is the flattening of the yield curve in the US a harbinger of bad weather to come? Should the share price decline of certain tech companies be read with the experience of TMT stocks in 2000 in mind? Will US inflation end up overshooting the Fed’s objective? And last but not least, to what level will the trade disputes escalate?
    The United States is tightening its trade policy and moving increasingly away from the rules of the World Trade Organisation. After applauding President Trump’s tax cuts, the equity markets are less charmed by his protectionist threats. The transnational imbrication of trade means that it is unlikely to contract, but the atmosphere has certainly become more conflictual. For the moment, the US economy continues to boom. With GDP growth forecast at 3% in 2018, the economy is entering its ninth year of expansion. It is also beginning to show a few signs of tensions, which are likely to encourage the Federal Reserve to continue tightening its monetary policy gradually.
    The recovery is expected to continue at a robust pace in 2018. In any case, that is what the most recent confidence surveys indicate. From a more fundamental perspective, the absence of inflationary pressure suggests that the economy still has some unused resources. Persistently robust growth raises questions about the true levels of the output gap and potential growth rate. This double uncertainty explains why patience, persistence and prudence remain the ECB’s watchwords despite strong growth.
    Despite the strong recovery, the newly formed grand coalition agreed on an expansive fiscal policy. Infrastructure investment is stepped up and support to families and pensioners increased. On Europe, the coalition remains in favour of the Growth and Stability Pact. However, in the short-term the macroeconomic effects of the programme are likely to be limited, as the economy is already operating at full capacity. In the long-term, the economy should benefit from the investment in infrastructure. Enterprises might hold back on investing in Germany given the tight labour market, generous pay deals and high corporate taxation.
    In 2017, French growth moved up a gear: it reached 2% in annual average terms, after 1.1% in 2016, and accelerated in the fourth quarter to a pace close to 3% a year. 2018 is expected to be another year of strong growth (2.3%, in annual average terms, according to our forecasts) but with a different quarterly pattern and breakdown. Indeed, we see growth plateauing or decelerating slightly from one quarter to the next. The surveys data available for the first months of the 2018 are sending a similar message of a likely peak in growth in Q1. In terms of its engines, we expect average annual growth to be supported by an acceleration in household consumption and exports which would take over from private investment.
    The recovery has become more self-sustained, benefiting from stronger domestic demand and net exports turning positive again. In 2017, real GDP rose by 1.5%. Labour market conditions further improved, supporting household expenditure. Favourable financing conditions and fiscal incentives continued to bolster expenditure on capital goods and advanced digital technologies. In 2017 the number of housing transactions increased for the fourth year in a row, albeit at a slower rate than in the past. Several indicators predict a mild improvement in the real estate sector’s general conditions in the months to come.
    Seven years after Fukushima, Japan has seen a rebound in activity driven mainly by the international environment, but also by the expansionist policy of its Prime Minister, Shinzo Abe. Exports are running at full throttle, unemployment is down to a tiny proportion of the active population, and the stock market is nearing record highs. However, behind this economic upturn, the backdrop has changed little. Heavy, recurring public deficits, massive debt, low SME productivity, poor resource allocation, labour market duality, low female labour participation… the Japanese economy still faces a number of chronic problems at a time when population ageing is accelerating.
    Despite the current economic recovery and a persistently favourable international environment, it is still premature to hope for sustainable fiscal consolidation. The errors of fiscal policy in past years have left their mark in the form of deteriorated public finances. The new administration that will take power in January 2019 will face the formidable task of meeting high social expectations while laying down fiscal targets that reassure investors. Structural reforms will have to be reintroduced, such as the pension reform that was swept under the carpet by the Termer administration. Without structural reforms, Brazil’s public finance trajectory could become unsustainable in the medium to long term.
    Russia consolidated its macroeconomic fundamentals in 2017. The economy swung into growth of 1.5% after contracting 0.2% in 2016. The fiscal deficit narrowed sharply to 1.4% of GDP thanks not only to higher oil and gas revenues but also to spending cutbacks. The central bank has demonstrated its capacity to face up to rising credit risks and troubled banks. The creation of a “bad bank” should help clean up the banking sector even further. Despite persistently strong headwinds that are preventing growth from accelerating, the rating agency Standard & Poor’s has upgraded Russia’s sovereign rating to BBB-. However, new US sanctions against oligarchs should weigh on economic growth.
    On the positive side, growth is accelerating rapidly and should return to levels close to the potential growth rate as of fiscal year 2018/19. Private investment finally seems to be entering a sustainable recovery. As part of a bank recapitalisation plan, public banks, whose asset quality has deteriorated further, received an injection of nearly USD 14 bn in March, which should help ease the pressures on the most fragile banks and bolster the rebound in investment. On the negative side, the government has taken a pause from the consolidation of public finances. The current account deficit has widened slightly, reflecting a deterioration in the terms of trade and a decline in export market shares.
    Trade tensions between China and the US are growing. China continues to enjoy a very strong external financial position, and exports to the US account for only 4% of its GDP. Therefore, any implementation of tariff hikes by the US should have a moderate direct impact on China’s macroeconomic performance. However, protectionist measures could dampen its export growth and constrain the industry’s efforts to climb the value chain, whereas China is starting to see a slight loss of its world market share. Moreover, weaker-than-expected growth in exports and GDP could shake the determination of the authorities to slow the rise in domestic debt.
    Greece is preparing to exit the European bailout programme. Activity is slowly picking up, driven by a positive economic environment and renewed confidence boosted by the programme’s smooth progress and prospects of it coming to an end. The country must now kick start its economic recovery. Greece has a large budget surplus before debt interest payments, and is preparing its return to the capital markets. Public debt is high (180% of GDP), but will only be refinanced very gradually. Negotiations currently in progress with Brussels could further strengthen its sustainability.
    Economic growth is expected to accelerate slightly in 2018 as Norway benefits from the favourable cyclical environment of its main trading partners. Investment is also expected to boost activity thanks to favourable growth prospects and persistently advantageous financing conditions. Job creations and wage growth are expected to boost household consumption while the government will make use of a more favourable environment to pursue a less expansionist fiscal policy.
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